Robert Brusca

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Sectors show some mixed consolidation after a long downward slide form early 2018.

Weakness: In EMU Industrial production (IP) excluding construction (the headline series) has fallen for two months in a row and has not risen in three-months. Month-to-month change in IP have been negative or flat in seven of the last eight months. That is quite a legacy of weakness. Manufacturing has seen two month-to-month increases in the last eight months against six declines.

EMU production clearly is weak.

Progressive weakness by sector
There is sequential or progressive weakness from 12-months to 6-months to 3-months for the headline series, for manufacturing, for consumer goods overall, for consumer goods durables, for consumer goods nondurables and for intermediate goods. The sole exception is capital goods that in any event show declines on all horizons and show a deeper decline over three months (annualized) that over 12-months.

The manufacturing weakness is deep seated and broadly affects all sectors.

Quarter-to-date weakness
The quarter-to-date declines are deep and their annualized drop also exceeds their year-over year drop for all categories. The percent of last peak calculations seem to show the most slack in consumer durables and in intermediate goods.

The manufacturing PMI diffusion index from Markit tracks IP (Yr/Yr percent changes) quite well on the way up and on the way down. While IP plunged and recouped and has weakened again the PMI gauge has continued to show straight-line ongoing weakness for EMU until this last month when it steadied.

Country by country weakness
The data in the table by country are colored coded with the red countries in the table’s stub all being IP results showing trends as sequentially deteriorating 12-months to 6-months to 3-month. Among the 14 countries in the table, eight show sequential deterioration in progress. Finland and Norway come close to showing sequential acceleration, but no country really does that. The median for EMU shows sequential deterioration. Over three-months ten of 14 countries in the table log output declines. That compares to eight over six-months and 6 over 12-months. .


While there has been ongoing declines in IP and although weakness is widespread five countries in the table still have output at 90% or better of their past cycle peak. Four more are 84 percent of their past cycle peak or better and the rest of them are no weaker than 25% below their past cycle output peaks. The weak group includes Greece, Malta, Luxembourg, Spain and Italy. The strong group includes Norway, The UK, Portugal, The Netherlands and Germany. Looking at the relation to past peaks by sector consumer durables are the weakest at 77% of their past peak. That is something to watch since durables consumption/output is highly cyclical. However, capital goods output is still strong within 5% of its last cycle peak, despite the recent slowdown

On balance Europe remains in a slowing mode. The PMI data show a more worrisome profile that the IP data by itself. And while the results for the recent 3-months seem quite grim the performance in the most recent month is not despite the decline for IP overall (which is mostly on the back of weakness in Germany).

Europe is still trying to see how it has re-invented itself in the wake of European elections. The UK is selecting a new PM and looking to renegotiate a Brexit deal with a cast that is looking much more friendly at the prospect of a hard Brexit with Mr. Boris Johnson in the lead, in better physical shape, but still without a comb… no wonder the prospect of a disorderly exit does not seem to bother him.

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Sectors show some mixed consolidation after a long downward slide form early 2018. Weakness: In EMU Industrial production (IP) excluding construction (the headline series) has fallen for two months in a row and has not risen in three- [...]

EMU IP Continues to Erode

Tom Moeller

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Initial unemployment insurance claims rose to 222,000 in the
week ending June 8 from 219,000 during the prior week, revised from 218,000.
Claims remained near their lowest level since December 1969. The latest reading
compared to expectations for 217,000 claims in the Action Economics Forecast Survey. The
four-week moving average of initial claims rose to 217,750 from 215,250 in the
previous week. During the last 20 years, there has been a 70% correlation
between the level of initial claims and the m/m change in nonfarm payrolls.
Continuing claims for unemployment insurance gained to 1.695
million from 1.693 million in the week ending June 1. The four-week moving average of
claimants declined 1,000 to 1.673 million, the lowest level since November 1973.
The insured rate of unemployment remained at the record low
of 1.2% in the week ending June 1, where it's been for twelve months. The series
dates back to 1970.
Insured rates of unemployment vary widely by state. In the
week ending May 25, the lowest rates were in South Dakota (0.27%), Nebraska
(0.35%), Florida (0.41%), North Carolina (0.44%), Indiana (0.44%) and North
Dakota (0.44%). The highest rates were in Massachusetts (1.41%), Pennsylvania
(1.60%), Connecticut
(1.72%), California (1.86%), New Jersey (1.90%) and Alaska (2.04%). Among the
other largest states by population, the rate was 0.95% in Texas, 1.21% in New
York and 1.42% in Illinois. These state data are not seasonally adjusted.
Data on weekly unemployment claims going back to 1967 are
contained in Haver's WEEKLY database, and they are summarized monthly in USECON.
Data for individual states are in REGIONW. The expectations figure is in
the AS1REPNA database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
 <tr>
 <th class="firstcol" >Unemployment Insurance (SA, 000s)</th>
 <th>06/08/19</th>
 <th>06/01/19</th>
 <th>05/25/19</th>
 <th>Y/Y %</th>
 <th>2018</th>
 <th>2017</th>
 <th>2016</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Initial Claims</td>
 <td >222</td>
 <td >219</td>
 <td >218</td>
 <td >1.4</td>
 <td >220</td>
 <td >244</td>
 <td >262</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Continuing Claims&nbsp;</td>
 <td >--</td>
 <td >1,695</td>
 <td >1,693</td>
 <td >-1.6</td>
 <td >1,756</td>
 <td >1,961</td>
 <td >2,135</td>
 </tr>
 <tr>
 <td class="firstcol" >Insured Unemployment Rate (%)</td>
 <td >--</td>
 <td >1.2</td>
 <td >1.2</td>
 <td >
 1.2 
 (Jun 2018)
 </td>
 <td >1.2</td>
 <td >1.4</td>
 <td >1.6</td>
 </tr>
 </tbody>
</table>
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Initial unemployment insurance claims rose to 222,000 in the week ending June 8 from 219,000 during the prior week, revised from 218,000. Claims remained near their lowest level since December 1969. The latest reading compared to [...]

U.S. Initial Claims for Unemployment Insurance Rise

http://192.168.1.61:82/comment/comment.html?c=190612a.html
file://N:\winnie\Commentory_HTML_2_decimal points.xlsm
can be found <a href="https://www.federalreserve.gov/newsevents/speech/files/brainard20190612a.pdf" >here</a>.

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 <period>2019-06-12</period>
 <title>U.S. Small Business Optimism Strengthens Significantly</title>
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The National Federation of Independent Business (NFIB)
reported that its Small Business Optimism Index increased to 105.0 during May,
up for the fourth straight month. It was the highest reading since October. The
index gained 1.4% m/m, but was down 2.6% y/y.
A sharply higher 30% of firms thought that now was a good
time to expand the business, up from a 20% low in January. The percentage
expecting higher real sales rose to 23%, its highest percentage since December.
An improved 16% of respondents expected the economy to improve, but that
remained down from a high of 48% in January 2017. A strengthened 30% of firms
expected to make capital outlays, above the December low of 25%, but below the
high of 33% last August.
Expected pricing power continued to deteriorate last month as
a lessened 20% of firms were planning to raise prices. It continued to slip
below November's ten-year high of 29%. Current pricing pressure also fell. A net
10% of firms were raising average selling prices, still below the 19% high last
May.
Labor market readings showed modest m/m improvement. The 21%
of respondents planning to increase employment was the most this year.
Nevertheless, that remained below the record 26% in August. The 54% of firms
that were finding few or no qualified candidates for job openings rose m/m to
the highest since December.
Pressure to raise worker compensation stabilized m/m as a
steady 34% of firms were raising worker pay. It equaled the highest percentage
in January. The percentage of firms that were planning to raise compensation
surged m/m to 24% m/m, up from 18% three months earlier.
Credit remained easy to get. Only four percent of firms
reported trouble obtaining financing, roughly equaling the percentage of the
last four years.
The small business survey inquires about additional issues
facing small business. A sharply increased 25% reported problems with the
quality of labor. That equaled November's record high. A low 16% indicated that
taxes were the largest problem, down from a December 2014 high of 27%.
Government requirements were worrisome to a lessened 12% of respondents, below
the September 2013 high of 24%. A steady eight percent of firms reported the
cost of labor as the most significant problem, down from February's increased
ten percent. Poor sales eased to eight percent of firms as the biggest problem.
Competition from large businesses rose to ten percent as the biggest problem.
Insurance costs/availability concerned a low ten percent of respondents.
Financial &amp; interest rate problems worried two percent of respondents. Inflation
worried&nbsp; two percent of respondents as the biggest problem, about where its
been since 2015.
Roughly 24 million small businesses exist in the U.S. and
they create 80% of all new jobs. The index is based 1986=100. The typical NFIB
member employs 10 people and reports gross sales of about $500,000 a year.
The NFIB figures can be found in Haver's SURVEYS
database.


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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col" >National Federation of
 Independent Business (SA, Net % of Firms)</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Mar</th>
 <th scope="col" >May'18</th>
 <th scope="col" >2018</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Small Business Optimism Index (1986=100)</td>
 <td >105.0</td>
 <td >103.5</td>
 <td >101.8</td>
 <td >107.8</td>
 <td >106.7</td>
 <td >104.9</td>
 <td >95.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Firms Expecting Economy to Improve</td>
 <td >16</td>
 <td >13</td>
 <td >11</td>
 <td >37</td>
 <td >32</td>
 <td >39</td>
 <td >-5</td>
 </tr>
 <tr>
 <td class="firstcol" >Firms Expecting Higher Real Sales</td>
 <td >23</td>
 <td >20</td>
 <td >19</td>
 <td >31</td>
 <td >26</td>
 <td >23</td>
 <td >5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Firms Reporting Now Is a Good Time to
 Expand the Business</td>
 <td >30</td>
 <td >25</td>
 <td >23</td>
 <td >34</td>
 <td >30</td>
 <td >23</td>
 <td >10</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Firms Planning to Increase Employment</td>
 <td >21</td>
 <td >20</td>
 <td >18</td>
 <td >18</td>
 <td >21</td>
 <td >18</td>
 <td >11</td>
 </tr>
 <tr>
 <td class="firstcol" >Firms With Few or No Qualified
 Applicants for Job Openings (%)</td>
 <td >54</td>
 <td >49</td>
 <td >54</td>
 <td >48</td>
 <td >51</td>
 <td >49</td>
 <td >46</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Firms Expecting to Make Capital Outlays</td>
 <td >30</td>
 <td >27</td>
 <td >27</td>
 <td >30</td>
 <td >29</td>
 <td >28</td>
 <td >26</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Firms Reporting That Credit Was Harder
 to Get</td>
 <td >4</td>
 <td >4</td>
 <td >6</td>
 <td >5</td>
 <td >4</td>
 <td >4</td>
 <td >5</td>
 </tr>
 <tr>
 <td class="firstcol" >Firms Raising Average Selling Prices</td>
 <td >10</td>
 <td >13</td>
 <td >12</td>
 <td >19</td>
 <td >15</td>
 <td >7</td>
 <td >0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Firms Raising Worker Compensation</td>
 <td >34</td>
 <td >34</td>
 <td >33</td>
 <td >35</td>
 <td >33</td>
 <td >27</td>
 <td >24</td>
 </tr>
 </tbody>
</table>


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The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index increased to 105.0 during May, up for the fourth straight month. It was the highest reading since October. The index gained 1.4% [...]

U.S. Small Business Optimism Strengthens Significantly

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The U.S. Treasury Department reported that the federal
government ran a $207.8 billion budget deficit during May compared to a $146.8
billion deficit one year earlier. A $198.2 billion deficit had been expected in
the Action Economics Forecast Survey. During the first eight months of FY'19,
the budget deficit deepened to $738.6 billion compared to a deficit of $532.2
billion during the first eight months of FY'18.
Net revenues rose 2.3% y/y so far this fiscal year compared
to a 2.6% y/y gain during in first eight months of FY'18. Individual income
receipts rose 1.5% y/y so far in FY'19, compared to a 9.0% y/y rise in the first
eight months of FY'18. Corporate tax receipts fell by 8.6% y/y so far this year
after a 25.4% eight-month y/y drop last year. Social insurance receipts rose
4.5% y/y following a 2.1% gain early in FY'18, and excise taxes rose by 15.1%
y/y after last year's 11.5% increase.
Government spending increased 9.3% y/y so far in FY'19 after
a 5.9% y/y rise last year over the same eight-month period. National defense
spending strengthened 12.4% y/y following no change y/y in the first eight
months last year. Spending on health programs increased 5.3% y/y, half the gain
last year while Medicare outlays rose by roughly one-quarter y/y following a
2.5% eight-month rise last year. Growth in income security payments have
increased 7.6% y/y so far in FY'19 after a slight decline in the first eight
months of FY'18. Social Security payments gained 5.7% y/y after rising 4.3% in
the first eight months of FY'18. Interest payments rose by 15.6% y/y, about the
same as last year. 
Haver's data on Federal Government outlays and receipts are
contained in USECON. Considerable detail is given in the separate GOVFIN
database. The Action Economics Forecast Survey numbers are in the AS1REPNA
database.

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 <tr>
 <th class="firstcol" scope="col" >United States Government
 Finance</th>
 <th scope="col" ></th>
 <th scope="col" >May</th>
 <th scope="col" >FY'18</th>
 <th scope="col" >FY'17</th>
 <th scope="col" >FY'16</th>
 <th scope="col" >FY'15</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Budget Balance (Billions)</td>
 <td >--</td>
 <td >$-207.8</td>
 <td >$-779.0</td>
 <td >$-665.8</td>
 <td >$-585.6</td>
 <td >$-439.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Fiscal 'YTD</td>
 <td >--</td>
 <td >$-738.6</td>
 <td >--</td>
 <td >--</td>
 <td >--</td>
 <td >--</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;As a percent of GDP</td>
 <td >--</td>
 <td >--</td>
 <td >3.9%</td>
 <td >3.5%</td>
 <td >3.2%</td>
 <td >2.5%</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" ></td>
 <td >% of Total</td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 </tr>
 <tr>
 <td class="firstcol" >Net Revenues (Fiscal Year YTD 2018, Y/Y
 Change)</td>
 <td >100</td>
 <td >2.3%</td>
 <td >0.4%</td>
 <td >1.5%</td>
 <td >0.6%</td>
 <td >7.6%</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Individual Income Taxes</td>
 <td >51</td>
 <td >1.5</td>
 <td >6.1</td>
 <td >2.7</td>
 <td >0.3</td>
 <td >10.5</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Corporate Income Taxes</td>
 <td >--</td>
 <td >-8.6</td>
 <td >-31.1</td>
 <td >-0.8</td>
 <td >-12.9</td>
 <td >7.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Social Insurance Taxes</td>
 <td >35</td>
 <td >4.5</td>
 <td >0.8</td>
 <td >4.2</td>
 <td >4.7</td>
 <td >4.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Excise Taxes</td>
 <td >3</td>
 <td >15.1</td>
 <td >13.3</td>
 <td >-11.8</td>
 <td >-3.3</td>
 <td >5.3</td>
 </tr>
 <tr>
 <td class="firstcol" ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 </tr>
 <tr>
 <td class="firstcol" >Net Outlays&nbsp; (Fiscal Year 2017 YTD,
 Y/Y % Change)</td>
 <td >100</td>
 <td >9.3</td>
 <td >3.2</td>
 <td >3.3</td>
 <td >4.5</td>
 <td >5.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;National Defense</td>
 <td >16</td>
 <td >12.4</td>
 <td >5.3</td>
 <td >6.1</td>
 <td >0.7</td>
 <td >-2.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Health</td>
 <td >13</td>
 <td >5.3</td>
 <td >3.3</td>
 <td >-1.9</td>
 <td >6.2</td>
 <td >17.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Medicare</td>
 <td >14</td>
 <td >22.7</td>
 <td >-1.4</td>
 <td >0.6</td>
 <td >8.7</td>
 <td >6.7</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Income Security</td>
 <td >12</td>
 <td >7.6</td>
 <td >-1.6</td>
 <td >-2.1</td>
 <td >1.0</td>
 <td >-0.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Social Security</td>
 <td >24</td>
 <td >5.7</td>
 <td >4.5</td>
 <td >3.1</td>
 <td >3.2</td>
 <td >4.4</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Veterans Benefits &amp; Services</td>
 <td >4</td>
 <td >22.8</td>
 <td >1.3</td>
 <td >1.2</td>
 <td >9.3</td>
 <td >6.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Education, Training, Employment
 &amp; Social Services</td>
 <td >2</td>
 <td >5.2</td>
 <td >-34.0</td>
 <td >31.6</td>
 <td >-10.2</td>
 <td >34.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Interest</td>
 <td >8</td>
 <td >15.6</td>
 <td >23.6</td>
 <td >9.1</td>
 <td >7.8</td>
 <td >-1.8</td>
 </tr>
 </tbody>
</table>


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The U.S. Treasury Department reported that the federal government ran a $207.8 billion budget deficit during May compared to a $146.8 billion deficit one year earlier. A $198.2 billion deficit had been expected in the Action Economics [...]

U.S. Government Budget Deficit Deepens

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The Mortgage Bankers Association reported that its total
Mortgage Applications Index surged 26.8% (45.0% y/y) during the week ending June
7 after the prior week's 1.5% rise. The rise reflected a 46.5% jump in
applications to refinance an existing loan, which have doubled y/y. Applications
to purchase a home increased 10.0% (11.8% y/y) after declining in six of the
prior seven weeks.
The effective interest rate on a 15-year fixed-rate mortgage
fell w/w to 3.61%, compared to a high of 4.71% early in November 2018. The
effective rate on a 30-year fixed-rate loan declined to 4.21% and remained below
the November high of 5.33%. The rate on a 30-year Jumbo mortgage fell to 4.09%,
down from its October peak of 5.09%. The rate on an adjustable 5-year mortgage
eased to 3.55%. It's recent high was 4.52% averaged last October.&nbsp; 
The average mortgage loan size surged w/w to $358,100 (20.7%
y/y) but remained below the record of $381,700 in late-March. For purchases, the
average loan size eased to $329,600 (+5.4% y/y). The average loan refinancing
size jumped to $386,800 (44.6% y/y). These series date back to 1990.
Applications for fixed-rate loans rose 43.3% y/y, while
adjustable rate loan applications gained 69.2% y/y.
The survey covers over 75% of all U.S. retail residential
mortgage applications and has been conducted weekly since 1990. Respondents
include mortgage bankers, commercial banks and thrifts. The base period and
value for all indexes is March 16, 1990=100. The figures for weekly mortgage
applications and interest rates are available in Haver's SURVEYW
database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col">MBA Mortgage Applications (%,
 SA)</th>
 <th width="152">6/7/2019</th>
 <th width="152">5/31/2019</th>
 <th width="152">5/24/2019</th>
 <th width="152">Y/Y</th>
 <th width="152">2018</th>
 <th width="153">2017</th>
 <th width="153">2016</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol">Total Market Index</td>
 <td>26.8</td>
 <td>1.5</td>
 <td>-3.3</td>
 <td>45.0</td>
 <td>-10.4</td>
 <td>-17.8</td>
 <td>15.6</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp;Purchase</td>
 <td>10.0</td>
 <td>-2.4</td>
 <td>-1.4</td>
 <td>11.8</td>
 <td>2.1</td>
 <td>5.6</td>
 <td>13.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">&nbsp;&nbsp;Refinancing</td>
 <td>46.5</td>
 <td>6.4</td>
 <td>-6.0</td>
 <td>97.2</td>
 <td>-24.3</td>
 <td>-34.0</td>
 <td>17.3</td>
 </tr>
 <tr>
 <td class="firstcol">15-Year Mortgage Effective Interest Rate
 (%)</td>
 <td>3.61</td>
 <td>3.74</td>
 <td>3.83</td>
 <td>4.37 (June '18)</td>
 <td>4.35</td>
 <td>3.59</td>
 <td>3.22</td>
 </tr>
 </tbody>
</table>


</body>

</html>

The Mortgage Bankers Association reported that its total Mortgage Applications Index surged 26.8% (45.0% y/y) during the week ending June 7 after the prior week's 1.5% rise. The rise reflected a 46.5% jump in applications to refinance [...]

U.S. Mortgage Loan Applications Surge; Interest Rates Fall Further

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Japan's orders surged in April. Both overall and core orders rose briskly in April with each gaining more than 4% month-to-month. The paths taken by total and core orders are quite different, however, Total orders decline over 12-months and fall even faster over 6-months, but log a strong 22.8% annual rate gain over three-months on strong gains in two of the past three months.

Core orders show accumulating strength. Core orders are barely lower falling by 0.4% over 12-months then they rise at a strong 9.8% pace over six months and at a whopping 52.5% annualized rate over three-months. Core orders have been rising by solid-to-strong amounts in each of the past three-months.

The core orders report is designed to be more stable by omitting the kinds of very large projects that are not consistent, that come and go, and can wreak havoc with the calculation of growth rates for orders. However, over three months both versions of the order series are looking hot.

Clearly orders are driven by domestic demand where they are up by 3.5% over 12-months, lower at a 3.2% annual rate over six-months, then rising at a strong annualized rate of 29.5% over three-months. Domestic orders are up extremely strongly in April driving the 3-month results against declines in each of the two previous months.

Foreign demand has been persistently weak. Foreign orders are down by 20.5% over 12-months they are down at a steep 40.5% annualized plunge over six-months and then are falling at a more moderate but sill fast annualized pace of 9.0% over three-months. Foreign demand is off very sharply in April falling by 24.7% month-to-month after solid-to-strong increases in each of the previous two months.



Japan’s PMI data tell an expanded story about the economy. The PMI story shows a moderate but expanding service sector against a manufacturing sector that has been weakening since late 2018 and that has been is a state of contraction since February of this year. Against that background the orders report is surprisingly strong. Clearly foreign weakness is depressing orders and holding back the manufacturing sector. And there must be negative knock-on effects for services as well. Fortunately there has been strength in domestic orders despite still moderate (below target) inflation and ongoing demographic headwinds.

On balance the orders report is encouraging. But orders are too volatile to be reassuring. The global environment remains difficult with Japan’s two largest trade partners locked in a trade war. The strong-seeming domestic environment for now is a backstop but with a consumption tax still scheduled for this year how long can that underpinning last?







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Japan's orders surged in April. Both overall and core orders rose briskly in April with each gaining more than 4% month-to-month. The paths taken by total and core orders are quite different, however, Total orders decline over [...]

Japan’s Orders Surge in April

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Inflation continues to stay under wraps. The Consumer Price Index
nudged 0.1% higher (1.8% y/y) during May following a 0.3% April rise. It was the
smallest increase since January. The gain matched expectations in the Action
Economics Forecast Survey. The CPI excluding food &amp; energy also rose 0.1%
(2.0% y/y) for the fourth consecutive month. A 0.2% gain had been expected.

Core goods prices continued to decline. The 0.1% easing
(-0.2% y/y) pushed them lower for the fourth straight month. The decline was led
by a 1.4% drop (+0.3% y/y) in used car &amp; truck prices. Education &amp; communications goods prices fell
0.5% (-6.0% y/y), off for the fifth straight month. Appliance prices eased 0.8% (+2.4% y/y)
and medical care product prices fell 0.4% (-0.7% y/y). Apparel prices held
steady (-3.1% y/y). Increasing by 0.1% (0.9% y/y) were new vehicle prices.
Recreation product prices also rose 0.1% (-1.0% y/y) following a 0.3% decline,
but video &amp; audio product costs dropped 1.0% (-9.3% y/y). Prices of
furniture &amp; bedding rose 0.7% (2.4% y/y), recouping a 0.7% April
decline.

Service prices improved 0.2% in April (2.7% y/y), following
two months of 0.3% gain. Transportation services prices rose 0.1% (1.1% y/y),
but the cost of public transportation surged 1.9% (0.9% y/y). Shelter costs rose
0.2% (3.3% y/y). Rents of primary residences
increased 0.2% (3.7% y/y) and the owners' equivalent rent of primary residences
gained a steady 0.3% (3.4% y/y). The cost of lodging
away from home eased 0.1% (1.6% y/y). Recreation services prices declined 0.5%
(+2.2% y/y) and the cost of medical care services rose 0.5% (2.8% y/y). Education &amp;
communication service costs increased 0.2% (1.3% y/y) as tuition costs gained
0.3% (3.5% y/y).

Lower energy prices held back the overall gain in the CPI
with a 0.6% decline (-0.5% y/y). It followed two months of strong increase.
Weakness was led by a 1.0% decline (-2.5% y/y) in natural gas prices and the
cost of electricity fell 0.8% (-0.2% y/y). Gasoline prices eased 0.5% (-0.2%
y/y) after three months of strong increase. Fuel oil costs weakened 0.3% (-0.8%
y/y), after firming for three straight months.

Food prices rebounded 0.3% last month (2.0% y/y) after a 0.1%
dip. Nonalcoholic beverage prices gained 1.2% (+2.2% y/y). Meat, poultry &amp;
fish prices surged 1.0% (1.4% y/y), but the increase was countered by a 2.2%
decline in egg prices (-15.6% y/y). Fruit &amp; vegetable prices fell 0.8% (+1.7% y/y).
Dairy prices strengthened 0.7% (1.0% y/y) while cereal &amp; bakery product prices rose 0.4% (2.2% y/y).

The consumer price data can be found in Haver's USECON
database with additional detail in CPIDATA. The Action Economics survey
figure is in the AS1REPNA database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Consumer Price Index, All
 Urban Consumers (% chg)</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Mar</th>
 <th scope="col" >Apr Y/Y</th>
 <th scope="col" >2018</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >0.1</td>
 <td >0.3</td>
 <td >0.4</td>
 <td >&nbsp;1.8</td>
 <td >2.4</td>
 <td >2.1</td>
 <td >1.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Total less Food &amp; Energy</td>
 <td >0.1</td>
 <td >0.1</td>
 <td >0.1</td>
 <td >2.0</td>
 <td >2.1</td>
 <td >1.8</td>
 <td >2.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Goods less Food &amp; Energy</td>
 <td >-0.1</td>
 <td >-0.3</td>
 <td >-0.2</td>
 <td >-0.2</td>
 <td >-0.2</td>
 <td >-0.7</td>
 <td >-0.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Services less Energy</td>
 <td >0.2</td>
 <td >0.3</td>
 <td >0.3</td>
 <td >2.7</td>
 <td >2.9</td>
 <td >2.7</td>
 <td >3.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Food</td>
 <td >0.3</td>
 <td >-0.1</td>
 <td >0.3</td>
 <td >2.0</td>
 <td >1.4</td>
 <td >0.9</td>
 <td >0.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Energy</td>
 <td >-0.6</td>
 <td >2.9</td>
 <td >3.5</td>
 <td >-0.5</td>
 <td >7.5</td>
 <td >7.9</td>
 <td >-6.6</td>
 </tr>
 </tbody>
</table>
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Inflation continues to stay under wraps. The Consumer Price Index nudged 0.1% higher (1.8% y/y) during May following a 0.3% April rise. It was the smallest increase since January. The gain matched expectations in the Action Economics [...]

U.S. CPI Increases Minimally; Core Prices Remain Tame

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Japan’s economy watchers index weakened in May after the current index showed some rebound in April. At a level of 44.1 the economy watchers current index was last weaker in June of 2016. The index has decelerated over 3-months 6-months and 12-months.

The Future index also fell on the month. It is also at its weakest point since June of 2016. The future index falls on all horizons from 3-months, from 6-months and year-over-year.

In the current index the weakest diffusion reading in May is for eating and drinking places with a diffusion reading of 40.7, its weakest performance since May of 2016. However, the biggest decline over the past 12-months is for the diffusion index for employment that fell by 9.3 diffusion points to stand at 44.9 in May.

The Current Index 
The diffusion readings also are ranked over a period from January of 2002 to date. The current headline has a 32 percentile standing putting it just into the lower one third of all readings since January of 2002. The strongest current reading on this time line is for services that show a 44.0 percentile standing still below that sector’s median for the period. The weakest value assigns to current employment with its 19 percentile standing in the lower one fifth of tis distribution. There are four readings in the bottom 25 percentile of their historic queues of value. That marks a lot of weakness against not strength at all in the current index or any of its components.

The Future Index 
At a reading of 35.6 the Future index also has a standing in the 32nd percentile of its historic queue of values. The weakest future component is housing with a 42.0 diffusion reading. The largest drop in diffusion over the past 12-months is for expected employment with an 8.9 point drop. The weakest component standing is for the expectation of manufacturers with a rank standing at its 19th percentile. Five components have a standing in their 25th percentile or lower. The strongest future reading is the 44th percentile standing, that one is for retail.

Momentum 
Over 12-months all the future components and seven of ten current diffusion indices show weaker reading than they had 12-months ago. Over six months the Future index showed deterioration in 6 of 10 diffusion measures, the same count as for the current survey. And while all diffusion readings show negative changes over six months only the future expectation for manufacturing shows a larger drop over three-months than it has seen over six months. However, if we annualize the drops over 3-months compared to six months there are larger drops over three months than over six months in 15 out of 20 of the current and future observations. Japan’s weakness remains in play.

Summing up 
On balance Japan’s economy is still weak. A revised first quarter GDP report today did lift Q1 growth to a +0.6% gain from a +0.5% gain but that is fine tuning the estimate and does not change the outlook in a meaningful way. Of course, with China, Japan’s largest trade partner, and the US locked in a trade war some additional fallout for Japan is still likely. There is unlikely to be a positive benefit from this trade war for Japan. Fortunately, Trump and Xi are still expected to be talking but the prospects for relief from the trade war are simply unknown.




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Japan’s economy watchers index weakened in May after the current index showed some rebound in April. At a level of 44.1 the economy watchers current index was last weaker in June of 2016. The index has decelerated over 3-months [...]

Economy Watchers Index Slips

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

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Tian Yong Woon

In our Letter this week, we explore Asia in two parts. The first reviews key developments from the past week, focusing on snap election outcomes in Japan (chart 1) and Thailand (chart 2), both of which delivered victories for incumbent parties and helped reduce near-term political uncertainty.

The second, and larger, section builds on last week’s discussion of Asia and AI, shifting the focus to AI’s potential impact on the region from an end-user perspective. On the upside, Asia stands to benefit meaningfully from the eventual large-scale adoption of AI-powered robotics, reflecting the region’s relatively high share of manufacturing value added (chart 3). That said, important considerations remain, including the cost viability of transitioning towards humanoid robotics given the sizeable upfront capital expenditure involved. Beyond manufacturing, AI adoption could also deliver gains in healthcare, particularly as many Asian economies grapple with ageing populations—implying a growing care burden alongside a shrinking domestic caregiver base (chart 4). However, regulatory, ethical, and implementation challenges persist. 

At the same time, the AI transition will likely displace certain jobs, making this a race not only of adoption but of adaptability, where education—while an imperfect proxy—offers some insight into which economies may be better positioned to adjust (chart 5). Finally, bureaucratic frictions also matter (chart 6), although even traditionally more bureaucratic economies have begun introducing fast-track frameworks to avoid falling behind in what could prove to be a pivotal transition reshaping the regional, and potentially global, economic landscape.

**Japan’s snap election**
Following a snap election held on Sunday, Japanese Prime Minister Takaichi’s Liberal Democratic Party (LDP) secured a historic landslide victory, winning a more than two-thirds majority in Japan’s 456-seat Lower House. The LDP’s coalition partner, the Japan Innovation Party, also expanded its presence to 36 seats. The outcome suggests that Takaichi’s political gamble to capitalise on strong opinion polling has paid off. While the election result has removed a key source of near-term political uncertainty for Japan, attention now turns to the policy agenda enabled by the government’s newly strengthened mandate. Among the first expected moves, Takaichi appears set to proceed with a temporary food tax pause, reducing the 8% consumption tax on food to 0% for two years. This proposal reinforces the perception that her policy stance is fiscally accommodative, even as critics raise concerns around fiscal discipline and long-term sustainability. As for the market reaction, Japanese equities rallied on stimulus expectations, bond yields rose on prospects of increased issuance to fund higher spending, while the yen recorded only muted net moves (chart 1)—prompting some speculation that some intervention may have taken place.

260210T1.jpg

**Thailand’s snap election**
Thailand also held snap elections last Sunday, which saw the incumbent deliver a strong showing at the polls. Unlike Japan’s election outcome, however, the scale of the increase in the incumbent Bhumjaithai (BJT) Party’s parliamentary footprint came as a surprise to many observers. That said, despite these sizable gains, the BJT Party fell short of an outright majority, securing 193 of the 500 seats in parliament, implying that a coalition government will likely still be required to pass legislation smoothly. Thai equities and the baht nevertheless rallied on the election results (chart 2). Attention now turns to whether—and how—Prime Minister Anutin will follow through on key campaign promises, including the revival of a popular shopping subsidy programme. While such measures would provide a near-term boost to consumption, they would also raise concerns around fiscal sustainability. Beyond the parliamentary vote, Thai voters also approved a proposal to replace the constitution. If pursued, this could pave the way for deeper structural reforms to Thailand’s economy.

260210T2.jpg

**AI’s (potential) impact on Asia**
We now turn to the longer, second part of this week’s letter, where we examine AI’s potential impact on Asia. In contrast to last week’s discussion, the focus here is on Asia’s role as an end-user of AI, rather than its position within the global AI supply chain. While AI broadly promises substantial productivity gains if deeply embedded across economies, one sector where Asia may benefit disproportionately is manufacturing. This reflects the relatively high share of manufacturing value added in GDP across many Asian economies compared with the global average (chart 3). In particular, Asia stands to reap significant productivity gains through the widespread adoption of AI-powered robotics. Cost, however, remains a key consideration: relative to the overall cost of human labour, AI-enabled robots have yet to become unequivocally competitive once high upfront capital outlays are taken into account. That said, recent advances in humanoid, AI-enabled robots have demonstrated increasingly broad and sophisticated capabilities in replicating human tasks, including delicate and precision operations. Over time, this could meaningfully alleviate a persistent structural challenge facing many advanced Asian economies—ageing populations and the associated labour constraints.

260210T3.jpg

Digging deeper into the ageing population challenge faced by many Asian economies, another area where AI and robotics could play a meaningful role is healthcare. Ageing societies face a twin burden: a rising number of elderly individuals requiring care alongside a shrinking pool of working-age caregivers, absent offsetting labour inflows. One proxy for this imbalance is the old-age dependency, which, as shown in chart 4, is already relatively high in several Asian economies, including China, Japan, and South Korea. That said, adoption remains at a very early stage. Significant barriers to widespread deployment persist, including regulatory and ethical considerations, high implementation costs, and questions around the consistency, reliability, and safety of AI-enabled systems in delivering healthcare-related tasks.

260210T4.jpg

**Asia’s challenges in AI adoption**
That said, the outlook is not entirely positive for Asia in the context of widespread AI adoption. As with previous waves of transformative technology, AI will inevitably render some jobs—at least in their current form—obsolete, even as it creates new roles and reshapes others. This implies that many Asian economies will need to navigate a significant structural adjustment in their labour markets, as certain types of work are displaced while demand for new skill sets emerges. How effectively Asia manages this transition will be critical in determining whether its economies move ahead of—or fall behind—the global shift towards AI. At present, and using education quality as a rough proxy, some Asian economies appear better positioned to manage this adjustment than others. As illustrated in chart 5, economies such as China, Singapore, Japan, and South Korea seem relatively well placed to absorb and adapt to the coming changes. That said, education quality is only an imperfect indicator. Other factors will also matter, including the capacity to rapidly retool and reskill the workforce, as well as the inclusiveness of the transition. Ensuring that lower-skilled and more vulnerable segments of society are not left behind will be an important determinant of the long-term economic and social outcomes of AI adoption across the region.

260210T5.jpg

Another potential hurdle relates to bureaucratic costs, which—when elevated—can act as a meaningful source of friction in the adoption of new AI-driven technologies. On this front, some Asian economies stand out for having comparatively low bureaucratic burdens, notably Singapore, Taiwan, and South Korea, while others, such as Vietnam, the Philippines, and China, tend to lag (chart 6). That said, as with many broad-based indicators, this picture masks important nuances. Several of these economies have introduced industry-specific—particularly AI-focused—fast-tracking initiatives aimed at accelerating development within targeted domestic sectors. Even so, in an increasingly competitive and intensifying global race to adopt AI and capture its economic upside, we may see a growing tendency toward an “adopt first, regulate later” approach in the years ahead. This is likely to persist unless and until major incidents or heightened concerns emerge that materially slow the pace of AI adoption.

260210T6.jpg

Asia

Economic Letter from Asia: Of Ballots and Bots

260209E.jpg

Japan's economy watchers index has flattened out and backed off slightly for the current and future outlooks depending on the time horizon that you seek. However, what's clear is that the index reached the low point around the middle of last year, has been rebounding and now the rebound has either run out of gas or slowed after the index has rebuilt itself considerably.  

It is certainly too early to get pessimistic on Japan's economy, with Prime Minister Sanae Takaichi having just won a significant - essentially a landslide - snap election that she called after recently having been elected. The LDP would appear to be back in the driver's seat, and she has her sights set on more fiscal stimulus and expanded military spending. She is apparently much more on the same wavelength as Donald Trump in the United States. Mr. Trump was an Abe supporter, and Ms. Takaichi is a disciple of Mr. Abe.

At the moment, Japan would seem to have a groundswell of support behind the government and that government is set to try to rekindle some growth which could potentially put the Bank of Japan in a more decisively defensive track as far as setting rates and potentially raising rates.

**Economy watchers index is trending**
In January, the economy watchers index backed off for the second month in a row. However, it still has a percentile standing in its 51-percentile, slightly above its median standing since early-2005. The headline and all the components have standings above their respective 50th percentiles on this timeline, with the exception of housing, services, and employment; three readings that are extremely important to consumers. Housing has a 26.1 percentile standing, services (the employment sector) have a 45.8 percentile standing, while employment has a 22.9 percentile standing. Despite the otherwise solid and strong set of readings, there are these three significant flies in the ointment. Corporate Japan is doing extremely well with corporations having a 66.8 percentile standing; manufacturers and nonmanufacturers, separately, each come in with readings in their mid-to-upper 60th percentiles.

**The future index**
The future readings from the economy watchers index show continued but slight increases over the last few months. Only two future readings weaken month-to-month: housing and employment—once again two key readings as far as consumers are concerned. However, in terms of current monthly diffusion readings, the assessment of households, retailing, housing, and employment all have current diffusion values below 50, indicating net declines rather than increases. The percentile standing is for the future index are, like those for the current index, generally upbeat - and generally stronger than for the current indexes - with the future headline posting a 66.4 percentile standing in January. However, like the current index, the standing for housing is at its 21.3 percentile and the standing for employment is at its 30th percentile, both well below the neutral level that would place the ranking at the 50th percentile. Corporations show high readings, higher for the future indexes than for the current index standings. There also are high readings and standings for eating and drinking places as well as services. It's good to see services come up with a strong rating since it creates hope for the future for employment because services are the core employment sector. It will be interesting to see how this value changes in the coming months as Takaichi’s new policies are implemented and take hold.

**Summing up**
On balance, the economy watchers index has been firm to strong. There is some slight give-back in the current index in terms of trend. But beyond the index, there's more immediate reason to be more positive because Japan has just executed a very decisive and pro-growth snap election that is going to put the new Prime Minister Takaichi and strong control of the economy at a time where she seeks to cement economic strength. These elections were just completed over the weekend, and we will see the results reflected in data in the weeks and months to come.

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Japan

Economy Watchers Indexes Show Firmness; Impact of Takaichi Election to Come in Months Ahead

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With the December report, Germany’s production and some of the early European industrial production data reveal a good deal of chaos in terms of the embedded trends. On the month, German industrial production fell by 1.9%, with consumer goods output up by 0.5%, capital goods output falling by 5.3%, and intermediate goods output falling by 1.2%. Among the early reporters in the monetary union—France, Spain, and Portugal—only Spain showed an increase in manufacturing IP in December; however, Spanish industrial production is notoriously volatile.

**Broader IP trends in Germany and elsewhere in Europe**
As for other early industrial production reporters, both Sweden and Norway showed strong-to-solid gains in December and each of them showed two-months of gains in a row. Beyond that, sequential growth rates from 12-months to six-months to three-months show accelerating growth in German consumer goods output against decelerating growth for intermediate goods. Real manufacturing output and real sales show mixed results- no clear trends; however, real manufacturing orders in Germany are off the map strong. 

**German manufacturing/industrial Surveys**
German industrial surveys from the IFO for manufacturing shows persistent weakening as well as for IFO manufacturing expectations, and in the EU Commission industrial index in the last three months. More broadly, Germany shows some modest but ongoing step up all of these based on average levels from 12-months to six-months to three-months for IFO expectations and the EU Commission industrial readings with mixed results for other survey readings.

**IP trends in Europe**
For the early reporting EMU members France, Spain, and Portugal, who report industrial production trends, each show mixed monthly trends against ongoing decelerations for manufacturing output over the broader sequential periods (12-month, to 6-month, to 3-month). However, for other Europe, Sweden and Norway, manufacturing trends are steadily accelerating on this broader timeline.

**A feeling of ‘Deja- What?’**
These combinations of opposed trends mixed with a lack of trends leave us with this sense of confusion about what's going on in manufacturing. For Germany, the extreme strength in orders is reassuring since orders should be forward-looking rather than backward-looking or even contemporaneous. But orders can also be a fickle series and so we'll have to watch it to see if the trends for German orders hold up.

**Current quarter-What’s been happening now**
In addition, current quarter growth for Germany actually looks quite good with industrial production up 3.7% at an annual rate in the current quarter, led by output increases in manufacturing against a decline in the intermediate goods output. Real orders in the quarter are surging at a 44% growth rate, while real sales in manufacturing only had a 0.1% uptick at an annual rate. The industrial indicators for Germany in the quarter show weakness or flatness with the only exception being IFO manufacturing expectations that advanced by a small amount. The three EMU members who report industrial production data show positive growth in the just-completed quarter except for Portugal where industrial production is falling at a 2.9% rate in the fourth quarter. Sweden and Norway, European countries but not monetary union members, show a strong 22% annual rate gain in Sweden against the 3% annual rate decline in Norway.

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**Rankings**
**How growth rates stack up…**
Moving away from short-term trends, the rankings of growth rates of these various metrics using 12-month growth rates on data back to 2006, show below-median growth rates for German industrial production and all three of its major sectors. All of them have rankings below the 50% mark where the median resides. Germany’s manufacturing output growth rate is below its median as is the growth of real sales; and once again real manufacturing orders break out and show a stunning 90th percentile standing, extremely strong compared to other growth rates on this period.

**Indicator rankings are poor**
However, the survey based industrial indicators for Germany, ranked based on their index levels, are all extremely weak and much weaker than German sector or other German metrics. The strongest indicator reading is the 29th percentile standing for IFO manufacturing expectations while the current ZEW index, IFO manufacturing index, and the EU Commission industrial readings, all reside below their 15th percentile. The survey rankings suggest that industrial sentiment is in much worse shape than activity and growth.

**IP elsewhere in Europe**
However, the growth ranking of manufacturing industrial production for the reporting EMU members and other European members are all quite solid, with percentile standings ranging from the 66th up to the 93rd percentile.

**Summing up**
From these data, Germany emerges as the weak economy compared with historic norms based on industrial production growth and indicator readings. However, there's a glimpse of positivity from the growth of real orders, and at the same time, some concern about ongoing sentiment for manufacturing in Germany as distinct from actual performance.

Germany

German IP Reveals Chaotic Trends

Andrew Cates

**The Global Monetary Policy Consensus**
The latest Blue Chip Financial Forecasts survey points to a notably more balanced global monetary policy outlook over the coming year. In contrast to the pronounced easing bias that dominated much of the past two years, expectations are now more symmetric, with a similar number of central banks projected to raise rates as to ease policy. Japan is seen delivering further tightening, while Canada is expected to initiate an interest rate hike in coming months. In Australia’s case, this tightening guidance was reinforced this week, with the Reserve Bank lifting its policy rate by 25 basis points. Elsewhere, and in contrast, the euro area, UK and US are expected to move in the opposite direction.

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**US manufacturing activity**
The second chart underscores the recent improvement in US economic momentum, highlighted by an unexpected surge in the January ISM manufacturing PMI. After spending much of the past year hovering below the 50 threshold consistent with stagnation, the index jumped sharply back into expansionary territory, signalling a renewed pickup in industrial activity. This rebound has coincided with a broader run of stronger-than-anticipated US economic data, as reflected in the upswing in the Citigroup Economic Surprise Index. Together, these developments point to a US economy that continues to display notable resilience, complicating expectations of monetary easing in the near term.

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**US Bank Lending Standards and Financial Stress** 
The next chart turns to US financial conditions, highlighting the latest readings from the Senior Loan Officer Opinion Survey. The net proportion of banks tightening lending standards on corporate loans and mortgages is now more modest by historical standards, and well below the extremes seen during past episodes of financial stress. Some easing in credit headwinds has occurred alongside relatively subdued readings on the OFR Financial Stress Index, which continues to hover below its long-run average. Together, these indicators suggest that the US financial system has continued to avoid the kind of acute stress typically associated with sharp slowdowns in credit availability—helping to underpin the recent resilience in economic activity.

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**Semiconductor Sales**
The fourth chart highlights the renewed surge in global semiconductor sales, with momentum strengthening sharply over recent months across the Americas, China and the broader Asia-Pacific region. After the cyclical downturn in 2022–23, sales have rebounded to fresh highs, reflecting a powerful revival in demand for advanced chips and related technologies. This upswing has taken place amid intense investor preoccupation with artificial intelligence, with expectations that AI adoption will drive a sustained wave of capital spending on data centres, cloud infrastructure and high-performance computing. In contrast, semiconductor sales in Europe remain comparatively subdued, reflecting the region’s smaller footprint in high-end chip manufacturing, weaker industrial demand, and the ongoing impact of slower economic growth. While semiconductors are inherently cyclical, markets have increasingly interpreted the current rebound elsewhere as structural rather than purely cyclical—underpinned by the belief that AI represents a transformative and durable source of demand growth.

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**Large-Scale AI Models**
The next chart illustrates the rapid proliferation of large-scale AI models globally, with newly updated data for 2025 pointing to a further sharp acceleration in development activity. The United States continues to lead by a wide margin, while China has also seen a steep rise in model deployment in recent years, underscoring the intensifying technological competition between the two economies. Growth in the UK and other regions has been more modest by comparison, highlighting the increasingly concentrated nature of AI innovation. Taken together with the surge in semiconductor sales, these trends help explain the market’s strong preoccupation with AI as a potential driver of future productivity and investment cycles—although the geographic concentration of activity also raises questions about the uneven distribution of any resulting economic gains.

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**An AI Bubble?** 
The final chart draws on the latest Blue Chip Financial Forecasts special questions, highlighting market participants’ perceptions of the economic gains likely to be delivered by artificial intelligence. While a sizeable share of respondents still believe that financial markets may be overestimating AI’s potential benefits, an increasing proportion now judge current expectations to be broadly accurate, with only a small minority viewing the gains as underestimated. Notably, this represents a softening in scepticism compared with the survey results from last month, when concerns about excessive market optimism were more pronounced. The shift suggests a growing acceptance that AI-related investment and innovation could translate into meaningful economic impacts—though uncertainty remains high around the scale, timing and distribution of these gains.

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Financial markets have experienced renewed gyrations in recent weeks, as shifting geopolitical risks, questions around Federal Reserve independence, renewed talk of US dollar “debasement,” and ongoing enthusiasm surrounding artificial intelligence have combined to drive volatility across asset classes. These cross-currents have also contributed to a degree of rotation away from high-flying technology stocks, as investors reassess valuations and the timing of anticipated AI-driven gains. Against this backdrop, the charts in this week’s COTW highlight several important themes. Policy rate expectations now appear more balanced globally, marking a clear shift away from the one-sided easing bias of the past two years (chart 1), even as resilient US data—underscored by the unexpected jump in the January ISM index and a run of positive economic surprises—continues to complicate the outlook for monetary easing (chart 2). At the same time, US financial conditions remain relatively benign, with limited evidence of widespread credit stress or aggressive tightening in lending standards (chart 3). Meanwhile, the sharp rebound in semiconductor sales and the accelerating rollout of large-scale AI models underscore why investors remain so focused on the AI narrative, even as Europe lags behind due to weaker industrial momentum and a smaller footprint in advanced chip production (charts 4 and 5). Finally, while some scepticism about AI’s ultimate economic impact persists, the latest survey results suggest a moderation in concerns that markets are materially overestimating its gains (chart 6). Taken together, these developments paint a picture of a US economy that remains more resilient than many had anticipated, set against a financial landscape increasingly shaped by powerful—if sometimes competing—narratives around geopolitics, policy, and technological transformation.

Charts of the Week: Balanced Policy, Resilient Data and AI Narratives

Winnie Tapasanun

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**Total job openings** fell 5.6% m/m (-12.9% y/y) to 6.542 million in December after a downwardly revised 7.0% decline to 6.928 million in November (previously -4.1% m/m; 7.146 million), according to the Job Openings and Labor Turnover Survey. December marked the third consecutive m/m fall and the lowest level since September 2020. The job openings rate declined to 3.9% in December, the lowest since April 2020, from 4.2% in November, remaining below a record-high 7.4% in March 2022. This rate is calculated as the ratio of job openings to total nonfarm employment plus openings. Significantly, the drop in job openings also lowered the **ratio of job openings to unemployed individuals** to 0.872 in December—the lowest since March 2021—from 0.890 in November, down from 1.085 in December 2024 and a pre-pandemic 1.211 in February 2020. A reading of 0.872 implies there were about 0.87 open jobs per unemployed person—indicating fewer openings than unemployed workers. December was the fifth time in six months that this ratio remained below 1.0.

**Private sector job openings** fell 6.8% (-12.5% y/y) to 5.804 million in December after a 6.6% fall to 6.227 million in November, registering the third successive m/m decline and the lowest level since September 2020. The private sector job openings rate fell to 4.1% in December, the lowest since April 2020, from 4.4% in November. The December m/m decline in private sector openings reflected drops of 27.7% (-36.9% y/y) in financial activities, 20.2% (-25.5% y/y) in professional & business services, 14.4% (-5.1% y/y) in trade, transportation & utilities, and 5.2% (-12.4% y/y) in private educational & health services. To the upside, private sector openings in the following categories rose m/m in December: other services (21.1%; 11.0% y/y), mining & lodging (17.6%; 0.0% y/y), information (13.5%; -4.7% y/y), manufacturing (8.5%; 0.5% y/y), leisure & hospitality (7.5%; -17.2% y/y), and construction (2.8%; 42.4% y/y). Meanwhile, government job openings rose 5.3% (-15.6% y/y) in December, the first m/m rise in three months, after a 10.6% drop in November.

**Total hiring** rebounded 3.4% (-1.5% y/y) to 5.293 million in December, the first m/m increase since September, following a 4.6% decrease to 5.121 million in November. The hiring rate edged up to 3.3% in December from 3.2% in November, though it remained below pre-pandemic levels. **Private sector hiring** rose 3.1% (-0.4% y/y) to 4.978 million in December, the third m/m rise in four months, after a 4.0% decline to 4.826 million in November. The private sector hiring rate rose to 3.7% in December from 3.5% in November, the same as in October and September. The December m/m increase in private sector hiring was led by a 32.1% jump (42.3% y/y) in information, followed by gains of 24.0% (-4.6% y/y) in financial activities, 23.5% (0.0% y/y) in mining & lodging, 6.5% (-4.8% y/y) in private educational & health services, 4.2% (-4.9% y/y) in trade, transportation & utilities, 3.6% (6.1% y/y) in construction, 3.4% (7.9% y/y) in leisure & hospitality, and 1.8% (-4.3% y/y) in manufacturing. To the downside, private sector hiring in professional & business services (-5.2%; +0.5% y/y) and other services (-4.3%; -16.5% y/y) declined m/m in December. Meanwhile, government hiring rebounded 6.4% (-16.3% y/y) in December, the first m/m rise since September, following a 13.5% drop in November.

**Total separations** rose 2.1% (3.3% y/y) to 5.251 million in December after a 1.5% rise to 5.144 million in November, marking the third m/m increase in four months and the highest level since September. The total separations rate edged up to 3.3% after holding at 3.2% in November and October. Private sector separations rose 1.6% (4.2% y/y) to 4.932 million in December, the highest level since June, while government sector separations jumped 10.4% (-9.1% y/y) to 319,000 following two consecutive m/m declines. **Total quits** (voluntary separations initiated by the employee) increased 0.3% (3.5% y/y) to 3.204 million in December, the third m/m rise in four months and the highest level since June, after a 7.4% rebound in November. The quits rate (a measure of workers’ willingness or ability to leave jobs) held at 2.0% in December and November, slightly below 2.3% in February 2020. Private sector quits eased 0.2% (+4.5% y/y) following an 8.4% November rebound. **Layoffs and discharges** (involuntary separations initiated by the employer) increased 3.6% (5.6% y/y) to 1.762 million in December, up for the third time in four months, after an 8.1% drop in November. The layoffs & discharges rate remained at 1.1% in December and November, marginally below 1.3% in February 2020. Private sector layoffs grew 4.3% (7.8% y/y) following a 7.3% November decrease.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

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- Job openings down 5.6% (-12.9% y/y) to 6.542 mil., third straight m/m decline.
- Hiring up 3.4% (-1.5% y/y) to 5.293 mil., first m/m increase since September.
- Separations rise to a three-month high; quits reach a six-month high; layoffs rebound.

Economy in Brief: 2019

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